An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. The rates for different types of income, such as personal earnings (wages), capital gains, and business income, may vary and some may not be taxed at all. In addition to United States federal income tax, income tax may also be levied by individual states. The rates of state income tax vary from state to state. Not all states levy an income tax. In addition, some states allow cities and/or counties to impose income taxes above and beyond the federal and state income taxes. Some cities collect income tax on not only residents but non-residents employed in the city. This tax can even be incurred when a non-resident works temporarily in the city.
Many people receive payment of at least a portion of their income by direct deposit. Direct deposit is a banking term that refers to a system used to transfer money, such as the Automated Clearing House (ACH). ACH is the name of an electronic network for financial transactions in the United States. Payment into an account by direct deposit contains information pertaining to the amount of the deposit and the identification of the entity that made the deposit into the account (i.e., the payor). Income payments received by direct deposit may incur a state, city, and/or county income tax. Determining whether an income payment is subject to such income tax is burdensome, complex, and time-consuming.